Japan-South Korea Currency Swap Poised to Lapse Amid Tension

By Andrew Joyce and Eunkyung Seo -
Oct 9, 2012

Japan and South Korea said they will
let a $57 billion expansion of a currency-swap agreement expire
on Oct. 31, amid tensions between Asia’s second and fourth-
biggest economies over disputed islands.

Japan’s Finance Minister Koriki Jojima told reporters in
Tokyo that the extra money was now “unnecessary,” leaving a
$13 billion deal in place. The Bank of Korea said separately
that the decision reflects the nation’s “improved resilience to
external shocks.”

The dispute over islands known as Dokdo in Korea and
Takeshima in Japan escalated after South Korean President Lee Myung Bak visited them in August. The spat has threatened
economic ties, with Japanese auto sales falling in the country
and South Korea saying resuming talks on a free-trade deal would
be difficult until the issue is resolved.

“Korea has lost one of its reliable financial safety nets,
a victim of the soured political relationship between the two
countries,” said Lee Sang Jae, a senior economist at Hyundai
Securities Co. in Seoul. “Korea may have become more resilient,
but the global financial and economic crisis is not over yet.”

Jojima said that the decision to let the swap deal expire
won’t prevent any further cooperation with South Korea if
needed.

“This is not a political decision, it is based on economic
and financial factors,” he said. “Macroeconomic conditions are
healthy and financial markets are stable.”

Buying Bonds

A senior official at the Japanese finance ministry told
reporters today that Japan will still consider buying South
Korean bonds, speaking on condition of anonymity due to the
ministry’s policy.

Junko Nishioka, chief economist at RBS Securities Japan
Ltd. in Tokyo and a former central bank official, said that the
decision came amid improved funding conditions in global
markets.

“There was no need to expand the swap line because the
U.S. Federal Reserve and European Central Bank have provided
liquidity to global markets,” she said.

Sales of Japanese carmakers in South Korea in August
dropped 12 percent, and companies attributed the decline to the
dispute, according to the Korea Chamber of Commerce and
Industry. Japan is South Korea’s second-biggest trading partner,
with commerce between the two rising 16.8 percent to $108
billion in 2011, according to the Korea International Trade
Association.

Fish, Natural Gas

The islets are 87 kilometers (54 miles) east of the closest
South Korean territory and 158 kilometers from the nearest
Japanese land. Sovereignty over the area means control of
fishing grounds and natural gas reserves, and South Korea has
bolstered its claims by stationing coast guard personnel there
year-round.

In a separate stand-off, China and Japan are at odds over
islands called Senkaku in Japanese and Diaoyu in Chinese.
Naoyuki Shinohara, a deputy managing director at the
International Monetary Fund, said today that any escalation
could hurt both countries and the global economy.

The IMF today cut its global growth forecasts as the euro
area’s debt crisis intensifies and warned of even slower
expansion unless officials in the U.S. and Europe address
threats to their economies. The world economy will grow 3.3
percent this year, the slowest since the 2009 recession, and 3.6
percent next year, the IMF said.